26 September 2017

South Africa: State Capture – the Corporate Fallout

analysis

As South Africa reels almost daily from allegations of 'state capture', the focus has mostly been on the accountability of those in power who have approved tenders for their friends and associates and broken the law in doing so. The spotlight has rightly fallen on the state and those in elected office.

More recently though it has been corporate South Africa that has found itself engulfed in the scandal surrounding President Jacob Zuma and his close associates, the Guptas.

Accounting firm KPMG removed seven of its directors along with the CEO after an internal investigation into allegations raised as a result of the work it did for the Gupta family from 2014 to 2015. In its investigation, KPMG concludes that 'while the investigation did not identify any evidence of illegal behaviour or corruption by KPMG partners or staff, this investigation did find work that fell considerably short of KPMG's standards'. Several actions will be taken, according to KPMG, which include 'a series of leadership changes' and 'enhanced quality control'.

Dealing with corruption requires an approach that spans both the public and private sectors

Alongside the demise of Bell Pottinger and other scathing allegations against consulting firm McKinsey & Company, this is probably the greatest fallout of #GuptaLeaks we've seen so far.

KPMG was also responsible for the report into the 'rogue unit' in the South African Revenue Service (SARS). The report hinted that former finance minister Pravin Gordhan knew about this unlawful unit, which became the basis of campaigns against him.

After its international investigation, KPMG said, 'This was not the intended interpretation of the report. To be clear, the evidence in the documentation provided to KPMG SA does not support the interpretation that Mr Gordhan knew, or ought to have known, of the "rogue" nature of this unit. We recognise and regret the impact this has had. KPMG SA had no political motivation or intent to mislead.'

Gordhan does not believe the 'KPMG accountability' has gone far enough. Should he sue the accounting firm, it may well bring to the fore more damning information than what is already in the public domain.

One may well say that the KPMG report is all too little too late. While KPMG was careful to parse its words, one wonders if more may eventually surface regarding its role in the 'rogue unit' report. And to what extent are other South African corporates complicit in 'state capture' - either by explaining it away or covering it up? It is unlikely that KPMG is the only firm that has been complicit in 'falling short' in some way.

More recently it's been corporate SA that has found itself engulfed in the Zuma-Gupta scandal

Section 1 of the Constitution demands a state that is based on the values of 'accountability, responsiveness and openness'. The public protector's report into 'state capture' as well as the daily drip-drip effect of the #GuptaLeaks emails show how very far South Africa has strayed from these founding principles and the laws that govern procurement.

So the question is: What lessons can be learnt from the KPMG implosion as it relates to the 'fight against corruption' in general? According to Daniel Kaufmann, president of the National Resource Governance Institute and an anti-corruption specialist, dealing with corruption requires an integrated approach that spans both the public and private sectors.

On this measure, South Africa doesn't fare too badly. In many senses, the country has a strong anti-corruption framework. The Prevention and Combating of Corrupt Activities Act creates the general all-encompassing offence of corruption. It covers any person who, directly or indirectly, accepts any gratification or gives, agrees or offers to give any gratification in order to act in a manner designed to achieve an 'unjustified result'. The act also creates a number of specific offences, including corruption relating to tenders, contracts and public officials.

Together with the Public Finance Management Act and an extensive regulatory framework for state-owned enterprises and companies, as well as strong freedom of information laws, the legislation is in place.

The KPMG saga will cause corporates to apply their minds in a way that King IV never could

When it comes to corporate governance, advances have been made since the publication of the first King Report on Corporate Governance in 1994. The first King report was continually improved on until the release of the latest iteration, King IV. The overarching aim of the King report has always been to ensure the highest standards of corporate governance in South African companies. These standards also apply to state-owned enterprises as well as those agencies that fall within the ambit of the Public Finance Management Act like Eskom, Telkom and the SABC.

The problem then is the gap between South Africa's laws and policies, and the implementation thereof. Laws are only as strong as those who have to implement them. The culture of transparency and accountability that those in power establish around the laws also matters.

Given that the allegations of state capture go to the very heart of the state, in South Africa it has become more and more difficult to enforce anti-corruption legislation and to ensure that there is accountability for wrongdoing in the public sector. It thus follows that the private sector would also use loopholes in accountability where they find them.

While some in KPMG have fallen on their collective sword, Zuma and his acolytes remain entirely unaccountable, thanks to captured institutions such as the National Prosecuting Authority, the Hawks and the public protector's office, to name a few.

Yet the importance of what has happened at KPMG cannot be underestimated. It will doubtless cause other corporates to apply their minds to issues of corporate governance in a more deliberate manner than the newly minted King IV ever could.

Judith February, Senior Research Consultant, ISS

South Africa

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